Workers Saving for Retirement Need Brokers To Act as Fiduciairies, Government Research Finds

A just-released government memorandum finds that people investing for retirement have lost billions of dollars as a result of abusive sales practices, and that brokers handling retirement accounts should be held to a stricter fiduciary duty standard to better protect workers’ retirement savings, according to an InvestmentNews article entitled “Brokers under White House scrutiny for costing workers billion in retirement savings.” The memo, which was drafted by the Chairman of the President’s Council of Economic Advisers (“CEA”), Jason Furman, reports that investor losses of between $8 billion and $17 billion are attributable to broker/financial adviser misconduct.

The CEA memo advocates that brokers and financial advisers be governed by a fiduciary duty, which requires them to act in the investor’s best interest, and to place investors’ interests ahead of their own. It states in part: “Consumer protections for investment advice in the retail and small-plan markets are inadequate…,” and only the placement of a fiduciary duty upon brokers and financial advisers offers “meaningful protections” to investors.

The brokerage industry has long objected to and lobbied against the imposition of a fiduciary duty standard of care as being too high and burdensome a duty. For four years, industry representatives have argued that having to act as a fiduciary would be too costly and would eliminate lower cost options for investors. “Any signal that the DOL [Department of Labor’s fiduciary duty] proposal is moving forward would cause us concern,” a brokerage industry lobbyist was quoted as saying.

The InvestmentNews article reports that the CEA memo and debate come in the midst of a “massive shift” away from defined benefit plans (e.g., pension plans) to defined contribution plans (i.e., 401(k) plans). The net effect of this is to shift the risks that retirement plans will not produce sufficient returns to fund a retirement away from professional money managers onto the back of workers who have no experience in the management of retirement plans.

As the CEA memo points out, many workers have been the victims of broker/adviser misconduct that arises out of an inherent conflict of interest. “Academic research has clearly established that conflicts of interest affect financial advisers’ behavior and that advisers often act opportunistically to the detriment of their clients,” the memo was quoted as saying.

For example, a broker who receives payment for the sale of a mutual fund or other investment has an interest in recommending it, even if it is not in the client’s best interest because there are other more suitable investments. Under the current “suitability standard” that the brokerage industry wants to keep, it would be okay for a broker to recommend a less suitable investment that the broker had a financial interest in recommending as long as it was not unsuitable based on the client’s investment profile.

The CEA memo was reportedly circulated to senior White House officials, and it is expected that President Obama will support the proposed fiduciary duty standard for brokers.